Lower GST in housing: how, why?

The Goods and Services Tax Council reduced the GST rates for under-construction houses and affordable homes.

GST is levied on sale of under-construction complex/building/civil structure or ready-to-move-in flats where a completion certificate has not been issued at the time of sale.
8% GST is levied on affordable housing and 12 % GST is levied on other under-construction houses.
Sale of ready-to-move-in or completed property does not attract GST if the sale takes place after issuance of completion certificate.
Benefit of Input Tax credit or ITC (At the time of paying tax on output, the amount of tax already paid on inputs can be reduced) was available to builders/developers.

The housing sector is facing lower sales of constructed houses and the slowdown in launch of new projects.
This lower offtake is also restricting money flow in the sector.
Also, builders were not passing on the benefits of input tax credit-ITC (Benefit of reducing the tax already paid on inputs from the final tax amount of any product) to home-buyers as lower prices.
They were adding the ITC element to the cost and then taxing buyers on the total amount, due to which the buyer had to pay high cost for the house.
This can be considered as one of the reason for low demand for houses resulting in widening of demand supply gap.
Hence, a Group of Ministers on real estate proposed lowering GST rate on affordable housing to 3% or less and on housing outside the affordable segment to 5%.

Rate change: The Council decided to lower the GST rate for residential housing to 5% from current 12% and for affordable housing to 1% from current 8%.
Implementation: The new rates will be effective from April 1.
Input Tax credit: The GST council opted to remove the Input Tax credit, which will withdraw the benefit of tax credit on inputs such as steel, cement and paint, etc.
Redefined affordable housing: It has been linked to the cost as well as carpet area.
- Flats up to Rs 45 lakh and with carpet area of 60 sq m in metros (Delhi-NCR, Bangalore, Chennai, Hyderabad, Mumbai-MMR, Kolkata) or 90 sq m in non-metro areas will now come under affordable housing.
80% Sourcing norms: The government is also expected to bring the rule for 80% sourcing norm, according to which the builders/developers will have to buy its 80% of inputs and capital goods from vendors who are registered to pay GST.

It will incentivize and give a boost to the residential segment of the real estate sector.
This will give boost to housing for all and fulfill aspirations of neo-middle class and the middle class.
The move is expected to bring relief to home buyers and narrow down the demand-supply gap in the real estate sector.
It is crucial to keep vigilance on a sector ridden with cash transactions and black money.

Revenue loss: Reducing the GST rate may result in revenue loss for some states.
Breaking of value chain: Absence of Input tax credit will break the value chain in the sector.
Price hike
- There may be some price hike in the sector in near future as builders are likely to pass on the burden of withdrawal of ITC to buyers.
- They may increase the base price of the house to recover the loss of input credit.
Issues with sourcing norms
- This could lead to use of more cash and result in flow of black money into the sector.
- The 80% sourcing norm also includes capital goods and hence it is feared that this norm would be met by purchase of capital goods and construction material then would be bought from unregistered dealers, which will give rise to tax evasion.

Procedural details regarding transition rules and norms for reversal of ITC are yet to come and it should be well analyzed to avoid any hurdle for the sector.
The 80% sourcing norm should exclude purchase of capital goods so that the major component of the 80% is fulfilled from purchase of construction material such as cement and sand.
Many other things in the sector are yet to be examined such as tax on commercial space in residential complexes, lease premium, and FSI transfer, etc.
A decision on GST on lottery is also yet to be concluded.

The Goods and Services Tax Council reduced the GST rates for under-construction houses and affordable homes.